Facebook’s Problems should Investors be Afraid?
The idea that Mark Zuckerberg and his team are frightened for the future of Facebook (NASDAQ: FB) is hard to accept but it is apparently true.
Even though Zuckerberg has created one of the most profitable, successful and fastest growing businesses on the planet he’s frightened of the future. What is scaring Zuckerberg to death is popular opinion and the ugly political climate it is breeding.
Why Mark Zuckerberg should be scared to Death
Zuckerberg has every right to be scared in the last few months his company has been savagely attacked by both the left and the right. Conservatives have attacked the Social Network for skewing the news against them, some Republicans have attacked the company for hostility to Donald Trump and leftists are now attacking it for promoting hate and spreading fake news.
A popular conspiracy theory supported by Change.org petitions is that Trump and his supporters somehow manipulated social media to steal the recent presidential election. Not surprisingly Facebook being one of the biggest social media companies is one of their main targets.
Even though there is little truth to such claims they can sway popular opinion and political action. One potential result of such thinking would be censorship or something like the “Fairness Doctrine.”
The Fairness Doctrine was a policy of the United States Federal Communications Commission (FCC) that required broadcasters present both sides of an issue it was in force from 1949 to 1987. The effect of the fairness doctrine was to suppress political speech. The Fairness Doctrine replaced an earlier ban on radio editorials called the Mayflower Doctrine.
History shows us that new technology is often used as a scapegoat for political failures. It also gives Zuckerberg reason to worry and act; and act he is by launching an effort to purge Facebook of fake news stories. Those stories give Facebook’s critics some circumstantial evidence to justify their attacks on free speech.
Fake news stories that claimed Hillary Clinton sold weapons to ISIS and the pope endorsed Trump received more attention on Facebook than real news from The Washington Post and The New York Times, Buzzfeed News reported. Zuckerberg is trying to tackle the problem even though he admits there might be no easy solutions.
What Zuckerberg is Scared of
Zuckerberg faces two fears here the first is that Facebook might degenerate into a cesspool of hate and propaganda that nobody wants like Twitter (NYSE: TWTR).
Twitter is losing money it had a negative profit margin of -16.7%, a negative net income of -$380.06 million and a return of equity of -8.52% on September 30, 2016. News reports indicate that several potential buyers including Disney (NYSE: DIS) turned down a Twitter acquisition because of its sleazy reputation.
The second is that efforts to restrict information flow will drive users to other more open social media. The biggest appeals of social media are its openness and ease of use. Kill those attributes and social media becomes little more than harmless chatter.
Facebook is making a Lot of Money
These fears might not be realistic because financial data reveals that Facebook is an enormously profitable money machine.
It reported a quarterly profit margin of 33.93% on September 30, 2016 – its’ highest ever. That profit margin was up from 31.63% in June 2016 and 19.91% in September 2015. These numbers are real; they can be viewed at ycharts and other financial websites.
Those profits translated into a lot of money, Facebook reported a net income of $7.505 billion on September 30, 2016. That net income grew by $1.483 billion during third quarter 2016, and by $4.68 billion in the year that ended on September 30, 2016. For the record Facebook reported a net income of $2.828 billion in September 2015; that grew to $6.022 billion in June 2016, and $7.505 billion at the end of 2016’s third quarter.
Facebook’s revenue has also exploded in the past year. It rose from $15.94 billion in September 2015 to $22.16 billion in June 2016, to $24.76 billion in September 2016. That made for an increase of $8.73 billion over the course of 12 months.
Facebook has a lot of Float and Cash
The fantastic amount of growth is not just confined to revenues. Facebook’s cash has been growing like a weed in recent months. In September 2015, Facebook had $15.83 billion cash and short-term investments. That figure grew to $20.62 billion in June 2016 and $26.14 billion in September 2016.
If ycharts’ figures are correct Facebook’s bank account grew by $10.31 billion in a year, and by $5.52 billion during third quarter. Mark Zuckerberg has created one of the most profitable companies in the world, and generated vast amounts of float.
In addition to the cash and short-term investments, Facebook reported $59.67 billion in assets (up from $49.41 billion a year earlier), $2.482 billion in free cash flow, $1.66 billion cash from financing and $12.58 billion in cash from operations. To add icing to the cake there was a market cap of $336.04 billion on November 18, 2016, and an enterprise value of $309.9 billion on September 30, 2016.
Facebook is a Value Investment
All this makes Facebook an incredibly wealthy company; and a value investment, because it has the resources to survive the storm of public opinion. If need be Zuckerberg can strike back at his company’s critics with the most powerful weapon of all cash.
If major changes need to be made to Facebook’s technology, Zuckerberg has the money to pay for them. He’s also in a great position to make acquisitions. If need be he has the money to buy Twitter; which had a market cap of $13.39 billion on November 18, and simply shut it down. Right now, Facebook could buy Twitter for cash and still have $12.75 billion left in its bank account.
This makes Facebook a great deal like a financial company or a bank, the value of the cash and resources it has exceed the risks and controversy it faces. Value investors need to take notice and buy now while the storm is raging. Another quarter like the last one and the $120.33 investors were paying for Facebook shares on November 20, 2016, will seem like a bargain.
Beyond cash; Facebook has vast resources with incredible potential. These include the world’s three largest social media networks; Facebook itself with 1.712 billion users, WhatsApp with one billion users and Facebook Messenger with one billion users, according to Statista. That makes for 3.712 billion total users.
This gives Zuckerberg the potential to create the largest media empire in history and control the flow of information around the globe. It also makes him and Facebook a natural target for demagogues like Donald Trump and extremists of all stripes.
If it can survive that and start paying a dividend Facebook might become one of the best income stocks around. No matter what happens we should buy Facebook shares now because their potential value is enormous. The fear might add to the value by scaring off investors, so buy Facebook.